Fewer Ads for Free Filers

There's a welcome change in store for taxpayers who use the Free File program run by the Internal Revenue Service.

The IRS said the vendors that provide the Free File service have agreed to stop pitching refund-anticipation loans and other products, such as insurance and mortgages. Those sales pitches were strongly criticized by consumer groups, which said such high-price financial products should not be aimed at low- and moderate-income families.

This is the fifth year of the service, in which the IRS teams with tax-preparation companies to allow individuals to file their returns electronically free. People must go to the IRS Web site (www.irs.gov) to use the service, which is available only to taxpayers with adjusted gross income of $52,000 or less, up from $50,000 last year.

"Free is free, and you will not be offered anything," said Bert DuMars, director of the IRS's Electronic Tax Administration.

Well, not exactly.

The removal of marketing from the Free File process could still use some fine-tuning. While it's true that all the sites now have a way for people to use the free service without ads, it's not 100 percent advertising-free. For example, many of the sites advertise that they will electronically file your state tax return for a fee. And there are links for what the providers call "value-added offers."

When you go to the IRS Web site and click on the Free File link, you are taken to a list of participating companies. You then have to click on a link for a company you may want to use based on whether you meet its criteria. For example, some vendors will file free returns only for people with an income of $30,000 or less or if they live in certain states.

In some cases, you still have to read through a lot of verbiage before you're taken to the Free File sign-in page on the vendor's Web site. If you know you qualify, go straight to "Start My Free File Return." If you don't see that wording, read through information about whether you qualify to file free, then click a button that says "Start Now."

Think of it shopping in a supermarket. Checkout lines often have rows of candy and other treats. It's a great marketing ploy because the wait gives your kids plenty of time to get on your last nerve begging for candy.

The begging caused parents to complain. Many supermarkets now have candy-free checkout lanes. Sometimes the signs identifying the no-candy lanes are easy to see and sometimes not. And you still have to get past the lanes with the candy.

It's the same thing with Free File. Sure, you can get to the portal with no ads, but there is still some advertising on the way.

Yet the recent change is better than what was available before - - bolder and more aggressive marketing for such things as high- cost tax-refund loans and franchising opportunities.

In a survey conducted by the IRS, 6 percent of Free File users bought something from participating providers. Of those, half said their purchases were not intended. DuMars said the IRS found that only 0.5 percent of taxpayers using Free File last year took out refund anticipation loans.

Still, consumer advocates were particularly disturbed about the marketing of refund-anticipation loans, or RALs, which are short- term loans -- typically seven to 14 days -- backed by borrowers' tax refunds. RALs cost about $30 to more than $125. Some tax preparers also charge a separate fee, often called an "application" or "document preparation" fee, of about $40, according to consumer advocates at the National Consumer Law Center and the Consumer Federation of America.

The fees for RALs, when expressed as an interest rate, can range from about 40 percent to more than 500 percent a year.

Every year, the two consumer groups launch campaigns to steer people away from the loans. The reduced advertising is a good step forward, said Jean Ann Fox, director of consumer protection for the CFA.

"A government Web site shouldn't be used to sell triple-digit interest rate loans to low-income workers," Fox said.

Not to mention that the loans are unnecessary. If you file electronically and have your refund deposited directly into your bank account, you get your money in two or three weeks.

Also new this year: Taxpayers will be able to use Free File to request the Telephone Excise Tax Refund. Some Free File companies will provide free access to Form 1040EZ-T for those people who aren't required to file tax returns but who are eligible for the one- time telephone excise tax refund.

Remember: To be sure you are using companies authorized to participate in the IRS program, you must go to www.irs.gov. Look for the "Free File" link.